Brian Fallow: Tough choices on power

As the Prime Minister heads off to Sydney to add to the peer pressure on other Asia-Pacific leaders to get serious about climate change, her Government is grappling with some tough choices at home.

New Zealand is at a crossroads in energy policy, but none of the signposts is marked "cheap and easy".

Under our Kyoto Protocol commitments we have to take financial responsibility for any increase in greenhouse gas emissions above 1990 levels.

But since 1990 CO2 emissions from the electricity sector have increased a whopping 137 per cent.

The reason, in a word, is Huntly.

Switching the 1000MW plant from natural gas to coal - reflecting dwindling supplies from the Maui gas field - followed by the need to run the plant increasingly hard, despite its inefficiency, to cope with relentlessly rising electricity demand has seen emissions from the sector's use of coal soar.

They reached 4.6 million tonnes of CO2 last year, five times the level in 2000 and nearly 10 times the level in 1990.

No wonder, then, that the Government wants to see Huntly relegated to the substitutes' bench - reserve capacity for dry years rather than a base-load stalwart.

The problem is that 1000MW will take a lot of replacing, especially as Huntly runs at a load factor of 85 per cent or more, about twice what the best wind farms could achieve.

Phasing it out over the next 10 years, say, would almost double the rate at which electricity generation capacity has to be added to the system anyway to accommodate demand growth.

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More gas-fired combined cycle plants, like the e3p plant that Genesis has just brought on line next to its Huntly plant, may look attractive.

Natural gas is a lot cleaner than coal from a greenhouse point of view but it is still a fossil fuel and represents on ongoing carbon liability - currently for taxpayers but inevitably in the future for electricity consumers.

And gas faces fuel supply issues.

The giant Maui field is now in its declining years and the new fields replacing it are much smaller.

Compared with the comfort and security of the Maui era it is a much more hand-to-mouth outlook. The e3p project was only bankable because the Government was prepared to underwrite the fuel supply risk.

Gas supplies are looking tight by the middle of the next decade and the crunch would come sooner if Contact were to build another gas-fired plant at Otahuhu and/or Genesis were to build one at Rodney.

More gas may be found, of course, but there is probably only a five-year window of opportunity for doing so, because of the lead-times involved in the alternative, importing liquified natural gas (LNG).

LNG might make sense for a power company with a lot of capital sunk into gas-fired generation capacity.

But it would be a fateful decision for the economy as a whole.

Even though most of the electricity we use is from renewable sources, the way the electricity market works it is the marginal generator - the most expensive power needed to meet demand - in any half-hour period which sets the wholesale price for that period. Whenever demand is at all heavy that is likely to be a thermal generator.

LNG prices are based on oil prices, which seem a lot more likely to rise than to fall over the coming decades.

And they would be subject to the exchange rate, which goes through big cycles.

Importing LNG would also tend to widen an already problematic current account deficit.

A report on LNG pricing commissioned by the Ministry of Economic Development last year concluded that with a US$60 oil price and a US55c exchange rate we would be looking at an LNG price of $11 a gigajoule.

That is twice the current price level.

No wonder then that policymakers are keen to reverse the trend of a declining share of electricity generation coming from renewable sources.

But the renewables route runs smack into the difficulty the Resource Management Act has in resolving conflicts between the national interest and "nimby" (not in my back yard) opposition to wind turbines and power pylons.

The Government's draft energy strategy reckons we could generate twice as much power from renewable sources - hydro, geothermal and wind - as we do now at a cost of less than 9c a kilowatt/hour.

But renewables tend to have a larger local environmental impact than fossil-fuel plants, even if they are kinder to the global environment.

And they have to be built where the resource is, requiring transmission lines.

There is ferocious opposition, of course, to Transpower's plans for a new transmission link across Waikato.

Nimby opposition delayed for years Meridian's plans for a wind farm at Makara, near Wellington, one of the more thinly populated parts of the country. It also threatens its plans for another large wind farm project, at Hayes, in Otago and killed the Project Aqua hydro scheme on the Waitaki.

Generators have complained that it takes years and costs a fortune even to renew existing consents.

Last week Contact chief executive David Baldwin fired a shot across the Government's bows.

To ensure new geothermal capacity is built by 2012-13, the Government should exercise its "call in" power under the RMA, he said.

Although Contact has said it wants the next $2 billion it spends on generation capacity to be renewables, Baldwin pointedly reminded the Government that a gas-fired Otahuhu C is consented and has been shelved on the assumption the Government will support the "timely development" of renewables.

The Rodney District Council, meanwhile, in a decision that may have more to do with looming local body elections than anything else, wants the Government to call in the application Genesis has lodged for a 480MW gas-fired plant.

When the Government calls in a resource consent application it refers it for consideration either by a special board of inquiry set up for the purpose or by the Environment Court. It has to be a matter of "national significance" arousing "widespread public concern" about its likely impact on the environment or likely to affect new Zealand's international obligations.

The powers have rarely been used, though they will be for the Waikato transmission line.

They do not change the factors to be considered in making the decisions. The advantage seems to be to save time, at the expense of limiting the scope for appeal for whoever loses.

Views differ among the generators about how much of a problem the normal RMA processes are.

But the current chorus of calls for call-ins suggests the Government may need to bulldoze a fast track through the consenting process if it wants to push Huntly into early retirement without saddling the economy with costly LNG-based power.